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The www.FedPrimeRate.com Personal Finance Blog and Magazine

Friday, March 13, 2009

No Reward for Prodigal Sons and Daughters

under water with student loan debtWhen I defaulted on my student loans back in the mid-90's, I was given the opportunity to make things right. William D. Ford agreed to purchase my student loan debt, and promised that if I didn't miss a payment for a year, they would remove all related derogatory items from my credit reports. I paid on time for a year, and they kept their promise. Having those negative items expunged from my reports was a huge deal for me, because my defaulted debt was holding me back financially.

Today, students who made similar mistakes with their student loan debt and who are now looking to rehabilitate their loans are hitting a brick wall. These students aren't able to get the negative marks on their credit reports removed because the current credit crisis has caused the market for student loan debt to dry up. Details of this issue can be found in this NextStudent.com press release. Here's a clip:

"...Before a defaulted borrower's student loan can be considered fully rehabilitated and the borrower's credit and loan status returned to good standing, the guarantor must resell the borrower's college loan to a new lender. But in the current credit freeze, no lenders are buying.

In November, the sole commercial bank still buying rehabilitated student loans announced it would no longer do so. Although a few non-bank entities may still purchase some of these college loans, 19 of the nation's 35 guarantors currently have no buyers for their student loans.

Each month, the Chronicle reports, $150 million in student loan debt is being added to the growing backlog of student loans awaiting rehabilitation.

Consumer advocates and guarantors are concerned that if something isn't done soon to help move these student loans out of default and restore borrower credit, borrowers may get tired of remaining in default and stop making payments on their student loans altogether -- which would lead to even more, snowballing defaults..."

But help is on the way. The Federal Reserve's Term Asset-Backed Securities Loan Facility (TALF) program is now greasing the wheels of the credit markets by providing the funds necessary to revive the market for all kinds of debt, including student loan debt.

My prayer for the TALF: Godspeed.

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